Berkshire Ups Its Goldman Stake

On Monday, Warren Buffett’s Berkshire Hathaway Inc. (BRK.A) : (BRK.B) exercised its revised warrant agreement with The Goldman Sachs Group Inc. (GS) for a net share settlement as of Oct 1, 2013.

As per the amended agreement, Goldman delivered Berkshire Hathaway the number of shares of common stock, which was equal in value to the difference between the average closing price of Goldman’s common stock over the 10 trading days prior to Oct 1, 2013 and the exercise price of $115 multiplied by 43.5 million shares covered under the warrant.

Specifically, Berkshire Hathaway received 13.1 million shares worth $2.15 billion and became the sixth largest external investor in Goldman with 2.91% stake. Moreover, the revised agreement lowered the dilution for Goldman’s shareholders and Buffett gained without deploying more funds.

During the latest financial crisis, Berkshire invested $5 billion in Goldman. Buffett’s investment followed the collapse of Lehman Brothers and the government’s bail out of American International Group Inc. (AIG) during the crisis.

In Mar 2011, Goldman redeemed preferred shares worth $5 billion, the investment made by Warren Buffett. According to the deal, Goldman paid 10% interest on preferred shares annually, representing an annual expense of $500 million before the redemption. Further, the redemption amount stood at $5.65 including 10% premium on investment, $125 million first-quarter 2011 dividend and $24 million in accelerated dividends. While the redemption came at a high price, it reduced expenses for Goldman.

After the redemption, Berkshire continued to hold warrants to buy 43.5 million common shares of Goldman at $115 per share before 2013. Notably, exercising these warrants would have awarded around 9% stake to Berkshire in Goldman. However, the agreement was revised in Mar 2013 and the cash settlement was changed to net share settlement as mentioned above.

Like Goldman, Buffett also invested $3 billion in General Electric Co. (GE) preferred stock in 2008 and still holds warrants to purchase $3 billion of common stock with a strike price of $22.25 per share expiring on Oct 16, 2013. On the whole, Buffett succeeded in its motive to gain on investments from troubled banks during the crisis.

Fundamentally, we expect Goldman to benefit from its well managed global franchise, strong capital base and industry leading position in trading and asset management. Goldman’s prudent business model and strong fundamentals are expected to deliver better earnings in the upcoming quarters. Currently, Goldman carries a Zacks Rank #3 (Hold).